The Guernsey Financial Services Commission has today issued a consultation paper to members of the Association of Guernsey Banks to seek their views on proposals to amend several key areas of regulatory policy and to introduce a range of measures aimed at safeguarding retail depositors. The proposals will reinforce Guernsey’s reputation as a mature and well regulated finance centre. The paper is entitled “Consultation on Parental Upstreaming and the Introduction of Depositor Protection and Ombudsman Schemes”. It will be placed on the Commission’s website today so that members of the public can study the proposals and offer their views. The Commission’s website is www.gfsc.gg. Comments should be provided to the Commission by the close of business on 15 September.
Peter Neville, Director General of the Commission said “The review has its origins in the “credit crunch” and more specifically in the problems experienced by the Guernsey subsidiary of Northern Rock plc prior to its transfer into public ownership.
That episode led us to consider the vulnerabilities inherent in a banking model that is widely used in Guernsey, which involves gathering retail deposits and then lending a large proportion of those funds to the parent bank – what we call “upstreaming”. The Northern Rock case also highlighted the fact that we do not have a deposit protection scheme to protect people who put their money with banks based here. There is a need both to protect members of the public and to safeguard Guernsey’s reputation. We have received a lot of questions from the press and individuals asking why we do not have such a scheme. Introducing one will demonstrate that Guernsey not only has banks that provide excellent service but also that we look after people who do business here. Initial informal soundings suggest that banks in Guernsey recognise the benefits of introducing a scheme.
As I explained in our Annual Report earlier this year, the credit crunch made it clear that we needed to review how we regulate banks. Now is the time for us to consult on those aspects of the changes that affect banks and the public directly.
In order to provide greater protection for retail depositors it is proposed to:
reduce parental upstreaming to a maximum of 85% of total assets. The Commission may impose further restrictions based on the level of perceived risk associated with the parent bank;
discourage the use of branch structures for new licensed banks, unless they are perceived to be systemically important at least in their home jurisdiction or are highly specialised in nature;
introduce a deposit protection scheme. Our proposal is that this would be limited to a maximum of £35,000 per individual depositor and to retail depositors only (as explained in section 3 of the paper). It would seek to provide depositors with quick access to funds;
strengthen the banking sector by requiring greater transparency through disclosure by individual banks to their depositors of:
- the existence (or otherwise) in the jurisdiction of a deposit protection scheme;
- the existence or possibility of parental upstreaming; and
- the status and nature of support extended by the parent to the local bank;
require banks to monitor the liquidity and solvency of the parent entity when they place funds with it;
require banks to have in place a contingency plan to withdraw some or all upstreaming without destabilising the parent;
impose stronger corporate governance arrangements through the requirement for at least one independent non-group non-executive director on the Boards of local banks; and
introduce an ombudsman scheme. Such a scheme would not be limited to the customers of banks and therefore this proposal will require further consultation with other regulated financial services sectors in Guernsey. The Commission believes that the introduction of such a scheme will afford further safeguards to depositors and customers generally.
The consultation paper sets out the benefits that would flow to Guernsey from having a deposit protection scheme and addresses the costs associated with a scheme which would be funded by the banking sector. Once we have received responses to the consultation paper, further work will need to be done to calculate how much of the retail deposit base would stand to benefit from a scheme. This will help us to be more precise about the potential cost to banks in the event that the scheme was triggered, and about the ongoing annual costs of having a scheme in place.
The views of the banking sector are also being sought on the possible establishment of an ombudsman scheme to resolve complaints from members of the public who have suffered losses or have other grievances. The way forward which is being suggested would involve limiting the costs by having the Commission provide resources to support an ombudsman in a way which did not conflict with our supervisory and regulatory responsibilities. Once we have received the responses to the paper on the proposed ombudsman scheme, we will consider extending the consultation process to the other parts of the finance sector”.
Note: The consultation period has now expired, but the consultation document is still available here.